Market framework

Definition of ‘renewable energy’

Is there any legal definition of what constitutes ‘renewable energy’ or ‘clean power’ (or their equivalents) in your jurisdiction?

Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 (the Renewable Energy Directive) on the promotion of the use of energy from renewable sources defines ‘energy from renewable sources’ as energy from renewable non-fossil sources, namely wind, solar, aerothermal, geothermal, hydrothermal and ocean energy, hydropower, biomass, landfill gas, sewage treatment plant gas and biogases, each of which are then defined separately within the Renewable Energy Directive. Although not clearly excluded from the scope of renewable energy by national legislation, for the purpose of this questionnaire, we have not considered nuclear energy as a renewable energy source.

The National Renewable Energy Action Plan adopted by the United Kingdom in accordance with article 4 of the Renewable Energy Directive additionally states that Ofgem, on behalf of DECC (now BEIS), administers schemes designed to promote the increased take-up of renewable generation (such as the Renewables Obligation scheme, the Renewable Energy Guarantees of Origin scheme and the FIT scheme). Each such scheme includes different eligibility criteria to determine whether the electricity generated is renewable, with Ofgem responsible for the accreditation of renewable generators in relation to such schemes. If Ofgem assesses that a station meets all the eligibility criteria under a particular scheme it can award accreditation. This accreditation allows renewable generators to claim support in the form of certificates that are sold to and used by suppliers for a variety of different purposes.

Framework

What is the legal and regulatory framework applicable to developing, financing, operating and selling power and ‘environmental attributes’ from renewable energy projects?

Broadly speaking, the Energy Act 2013 (together with secondary legislation) implements key aspects of electricity market reform and is a policy initiative pioneered by the UK government to mobilise £110 billion (approximately US$140 billion) of capital investment required by 2020 to ensure reliable and diverse supply of low-carbon electricity. This is the applicable regulatory framework for the developing, financing, operating and selling power and environmental attributes from renewable projects. Certain key aspects of the Energy Act 2013 are:

  • CfD: the Energy Act 2013 provides a legal framework for the CfD regime, setting out statutory obligations on suppliers and generators;
  • ROCs: the Energy Act 2013 introduced new sections to the Electricity Act 1989 to provide for the Secretary of State to make an order that imposes an obligation on Ofgem, the Secretary of State or a CfD counterparty to purchase the replacement for the renewables obligation certificates (ROCs) called ‘certificate purchase obligations’ in Great Britain; and
  • capacity market: the Energy Act 2013 empowered the Secretary of State to introduce a capacity market based on the government’s forecast of future electricity demand together with an analysis of existing security of supply.
Government incentives

Does the government offer incentives to promote the development of renewable energy projects? In addition, has the government established policies that also promote renewable energy?

Ofgem E-Serve administers environmental schemes and consumer and social programmes on behalf of the government, including schemes related to renewable energy, such as:

  • FIT: the scheme is a government programme designed to promote the uptake of renewable and low-carbon electricity generation technologies. Introduced on 1 April 2010, the scheme requires participating licensed electricity suppliers to make payments on both generation and export from eligible installations. The FIT scheme is available for anyone who has installed, or is looking to install, solar photovoltaic, wind, micro combined heat and power, hydro or anaerobic digestion technology types up to a capacity of 5MW, or 2kW for micro combined heat and power.
  • Contracts for Difference: the provision of CfDs are one of the key policy measures to incentivise new low-carbon electricity generation. The provision of CfDs is intended to stabilise revenues for investors in low-carbon electricity generation projects such as renewables, by helping developers secure the large upfront capital costs for low-carbon infrastructure. The CfD is a quasi-power purchase agreement; generators with a CfD will sell their electricity into the market in the normal way, and remain active participants in the wholesale electricity market. The CfD then pays the difference between an estimate of the market price for electricity and an estimate of the long-term price needed to bring forward investment in a given technology (the strike price). This means that when a generator sells its power, if the market price is lower than needed to reward investment, the CfD pays a ‘top-up’. However, if the market price is higher than needed to reward investment, the contract obliges the generator to pay back the difference. In this way, CfDs stabilise returns for generators at a fixed level, over the duration of the contract. This removes the generator’s long-term exposure to electricity price volatility, substantially reducing the commercial risks faced by these projects. The Energy Act includes a provision whereby a new UK government-owned company (the Low Carbon Contracts Company or LCCC) will act as the counterparty to eligible generators under the CfD. This mechanism was in direct response to concerns about the ‘credit’ behind the CfD economics. Although a CfD is a private law contract between a low-carbon electricity generator and the LCCC, the cost of CfDs will ultimately be met by consumers via a levy on electricity suppliers. The first CfD auction result published in February 2015 was a success, with a competitive allocation process, with the cost £105 million less than the original strike prices published for the same technologies. Last year, BEIS awarded 11 CfDs to a number of renewables projects across the UK, including Moray Offshore Wind Farm and Grangemouth Renewable Energy Plant. The second allocation round ran from March to September 2017 and culminated in three successful offshore windfarms (Hornsea Two, Moray East and Triton Knoll) and the results of the second allocation saw the cost of offshore wind energy drop by almost 50 per cent compared with the previous round, meaning offshore wind was cheaper than the levelised cost of gas and significantly cheaper than new nuclear. The third allocation round was opened in May 2019 with an overall budget of £65 million aimed at securing 6GW of electricity generation. The results of the third auction are not yet known.
  • The RO scheme: the RO scheme is one of the main support mechanisms for large-scale renewable electricity projects in the UK. Smaller-scale generation is mainly supported through the FIT scheme. The RO came into effect in 2002 in England, Wales and Scotland, followed by Northern Ireland in 2005. The scheme places an obligation on UK electricity suppliers to source an increasing proportion of the electricity they supply from renewable sources. The RO scheme closed to all new generating capacity on 31 March 2017.
  • The Domestic RHI scheme: the Domestic Renewable Heat Incentive (RHI) is a government financial scheme to promote the use of renewable heat. BEIS has undertaken a consultation process with respect to the existing Domestic RHI scheme and it is expected that, subject to parliamentary approval, the changes announced in the consultation response will come into effect during 2017.
  • The Non-Domestic RHI scheme: the Non-Domestic RHI is a government environmental programme that provides financial incentives to increase the uptake of renewable heat by businesses, the public sector and non-profit organisations. Eligible installations receive quarterly payments over 20 years based on the amount of heat generated.
  • The Climate Change Levy (CCL) Exemption: the CCL was introduced in April 2001 and is a tax on UK business, collected by energy suppliers, designed to encourage energy efficiency, reduce carbon emissions and promote energy from renewable sources. Businesses were previously able to claim an exemption if they could show a levy exemption certificate, showing that they bought energy from qualifying renewable energy sources. In the July 2015 budget, the UK government announced the removal of CCL exemption for electricity generated from renewable sources from 1 August 2015. In September 2015, Drax, along with one of the UK’s leading generators of renewable power, Infinis, announced that they were to apply for judicial review of the UK government’s decision to remove the CCL exemption. Drax and Infinis’ challenge was also based on the fact that when the CCL exemption was removed from electricity generated from combined heat and power plants, there was a two-year notice period, whereas in this case the notice period was only 24 days. Judgment was entered against Drax and Infinis on 10 February 2016. The High Court recognised the merits of bringing the case but noted that the government had not made any specific and clear assurances that the exemptions would continue to apply.
  • The Offtaker of Last Resort scheme: the OLR is a government scheme that aims to promote the availability of power purchase agreements (PPA). It is intended as a last resort to help renewable generators who cannot get a PPA through the usual commercial means. The OLR scheme is part of the government’s wider programme on Electricity Market Reform.

Are renewable energy policies and incentives generally established at the national level, or are they established by states or other political subdivisions?

Renewable energy policies and incentives are established at the national level under the National Renewable Energy Action Plan for the United Kingdom in accordance with the UK’s obligations under article 4 of the Renewable Energy Directive.

Legislative proposals

Describe any notable pending or anticipated legislative proposals regarding renewable energy in your jurisdiction.

In November 2016, the government published its plans to upgrade UK energy infrastructure, reaffirming its commitment to spend £730 million of annual support on renewable electricity projects, also setting out proposals for the next steps to phase out electricity generation from unabated coal-fired power stations within the next decade. This long-term plan is intended to provide confidence to investors that the UK is open to investment in new, cleaner energy capacity. This message was perhaps intended to allay fears following the 2015 General Election that there had been a shift in the government policy away from being ‘pro-renewables’, to what was described by some commentators as being more ‘pro-business’.

The second allocation process for CfDs for renewable generators begun in April 2017, aiming to provide support for projects to be delivered between 2021 and 2023. There will be no allocation of CfD budget for onshore wind or solar, consistent with the government’s view that these are mature or politically undesirable technologies which should no longer receive subsidies. The only technologies supported will be offshore wind, certain forms of biomass or waste-fuelled plant (advanced conversion technologies, anaerobic digestion, biomass with CHP) wave, tidal stream and geothermal.

The energy policy outlined above, coupled with the potential impact of upcoming negotiations relating to the withdrawal of the UK from the European Union, are likely to give rise to a legislative overhaul regarding the electricity sector including with respect to renewable energy.

Disputes framework

Describe the legal framework applicable to disputes between renewable power market participants, related to pricing or otherwise.

In relation to disputes that may arise between NGET and participants in the capacity market and CfDs, Ofgem will consider appeals made to it by participants in accordance with the relevant regulations. Such appeals may only be made to Ofgem following an initial appeal to NGET.

Dispute resolution between parties to the contractual arrangements governing the relationships between renewable power market participants are otherwise governed in accordance with the contractual terms agreed within the relevant contracts.